US equity markets defy volume expectations

US equity trading volumes increased by half in the first two months of 2009, despite widespread falls in asset prices and higher investor redemption levels, according to research from Credit Suisse Advanced Execution Services (AES).

US equity trading volumes increased by half in the first two months of 2009, despite widespread falls in asset prices and higher investor redemption levels, according to research from Credit Suisse Advanced Execution Services (AES).

Sustained deleveraging in the latter half of last year by hedge funds, institutional investors and sell-side proprietary trading desks has been followed by mixed anecdotal evidence of unpredictable peaks and troughs in trading volumes during the first quarter of 2009. But Credit Suisse AES’s analysis of average daily volumes in January and February shows a 25% rise in US trading over the same period in 2008, while volumes fell in Europe and Asia (16% and 13% lower) respectively year on year. Value traded slumped across all three regions, with the US experiencing a 27% decline to $227 billion.

With all three markets experiencing falling prices and high levels of uncertainty – factors that typically increase trading volumes – Credit Suisse AES identified three reasons why only the US is experiencing a rise in activity. First, exchange-traded funds (ETFs), which are more firmly established in the US than other markets, accounted for 25% of all equity trading in the US in February 2009. Second, the US has a higher proportion of high-frequency traders than any other large equity market. Aite Group recently published research asserting that more than 60% of the average daily trading volume in the US was conducted by high-frequency traders in 2008, while Credit Suisse points out that the average turnover of US stocks (i.e. the frequency with which a portfolio changes in a year) is much higher than in any other market, at just under four times.

Finally, Credit Suisse suggests that investors may be drawn to the US because it is better placed to recover from the economic downturn than Europe.

The report also notes a number of shifts in the US equity market microstructure in recent months. Average spreads in S&P 500 and Russell 2000 stocks have fallen from their November peaks but are still double last summer’s levels for Russell 2000 stocks. Credit Suisse also notes that the range of average spreads for US stocks has narrowed since November, albeit less so for Russell 2000 stocks.

In a break from well-established market trends, the Credit Suisse research also claims that order sizes are increasing for less liquid US stocks, due to the increased willingness of US traders to complete orders quickly in volatile trading conditions. Although average order sizes for both S&P 500 and Russell 2000 stocks had fallen to around 200 shares per trade, order sizes for Russell 2000 stocks – which include some less-liquid names – have increased from 175 in July 2008 to around 250 shares at present.

Credit Suisse suggests that higher potential impact costs in volatile markets are causing traders to try to fill an entire order at once, particularly for small- and mid-cap names.